MarketView for April 7

 

 

 

Summary 

 

The equity markets took a late-in-the-day hit on Wednesday, sending the major indexes into negative territory after a speech by Kansas City Federal Reserve Bank President Thomas Hoenig said keeping interest rates too low for too long would encourage risky financial behavior. The Federal Reserve's near-zero interest-rate policy has underpinned a rally of almost 75 percent since the March 9, 2009, low, and the removal of easy money is one of the market's biggest fears. Hoenig, however, was the sole dissenter at the most recent Fed meeting, advocating higher rates.  In contrast, Federal Reserve Chairman Ben Bernanke said the U.S. economy still faces significant headwinds, suggesting he was in no rush to raise interest rates.

 

Energy shares led the decline, with Exxon Mobil falling 0.8 percent to $67.34. Crude oil futures fell 1.1 percent to $85.88 per barrel, partially the result of data indicating a rise in inventories last week.

 

The CBOE Volatility Index .VIX, Wall Street's fear gauge, gained 2.4 percent after closing on Tuesday at a two-and-a-half-year low. Despite the gain, the VIX remains at low levels, suggesting complacency among investors.

 

Data from the Investment Company Institute showed domestic equity funds had outflows of $64 million for the week ending March 31, the second consecutive week of outflows. Domestic equity funds have experienced outflows in six of the last eight months, suggesting investors remain cautious.

 

Airline stocks could be in play Thursday after the New York Times reported that a possible merger was brewing between United Airlines and US Airways. UAL ended the day up 5.5 percent to $20.00, while US Airways rose 13.3 percent to $7.73 after the closing bell. The report lifted other airline stocks, including Delta, up 2.1 percent at $14.46, and Continental up 2.5 percent at $21.

 

Monsanto closed down 2.1 percent to $68.09 after the agricultural seed company reported a quarterly profit below expectations and warned it will not meet its 2010 earnings goal.

 

Shares of Palm saw its largest volume day on the Nasdaq, with 83.1 million shares changing hands. The stock rose 20 percent to $4.62 on speculation the smartphone maker may be an acquisition target.

 

Stocks gained some ground in the early afternoon after strong demand at a $21 billion Treasury auction of 10-year notes, but the momentum was short-lived. The markets will next see a $13 billion 30-year bond sale Thursday, which may prove a bit more difficult to handle.

 

Worries about Greece's debt load created a negative overhang early on after the government said the country's banks had asked for billions of euros in support and euro-zone states argued over the conditions of potential bailout loans.

 

Fed Chief says, “Economy not out of the woods”

 

The economy still faces significant headwinds, including a housing sector that has yet to recover convincingly and an ailing employment market, Federal Reserve Chairman Ben Bernanke said on Wednesday. In a speech that suggested he was in no rush to begin raising interest rates, Bernanke outlined a number of challenges to the country's growth outlook.

 

"Many Americans are still grappling with unemployment or foreclosure, or both," Bernanke said in prepared remarks to the Dallas Regional Chamber of Commerce. "We are far from being out of the woods.

 

Bernanke specifically mentioned the continuing weakness within the housing sector as a danger to the recovery, which he nonetheless conceded would be sustainable enough to bring down the unemployment rate slowly over time.

 

"We have yet to see evidence of a sustained recovery in the housing market," he said.

 

Against that backdrop, Bernanke saw no immediate reason to be worried about inflation, which he characterized as "well controlled." In addition, inflation expectations, which Fed officials have singled out as a crucial guidepost for policy, appear to be stable, Bernanke said, both as measured by market indicators and surveys.

 

"Several comments by Bernanke reinforce the sense that he does not favor policy tightening given the challenges facing an economy operating well below its potential," Goldman Sachs' New York-based U.S. economists wrote in a research note.

 

Bernanke said the Fed's ability to prevent future crises will hinge in part on the development of a resolution authority that would allow regulators to break up or wind down large financial institutions that run into trouble in an orderly fashion. He said the Fed had already made significant changes to its regulatory approach to reflect lessons learned from the crisis.

 

Consumer Credit Falls Unexpectedly

 

Consumer credit fell unexpectedly during February, reversing the prior month's surprise increase, as households refrained from taking on new debt in favor of deleveraging. February's total consumer credit outstanding dropped $11.51 billion or at a 5.62 percent annual rate to $2.45 trillion, the Federal Reserve reported on Wednesday.

 

January's figures were sharply revised upward to show a $10.64 billion increase, previously reported as a $4.96 billion rise.

 

The Federal Reserve, which pumped money into the economy to help break the worst downturn since the 1930s, has pledged to keep benchmark interest rates ultra low to nurture the recovery that started in the second half of 2008.

 

Non revolving credit, which includes closed-end loans for expensive items such as cars, boats, college education and holidays, slipped $2.07 billion, or at a 1.56 percent annual rate, to $1.59 trillion in February, the Fed said. Revolving credit, made up of credit and charge cards, tumbled $9.44 billion, or at a 13.06 percent rate, to $858.15 billion, the data showed.

 

Wall Street Wreckage Blamed on Greenspan

 

The resulting wreckage of Wall Street's subprime mortgage machine was laid bare on Wednesday by a U.S. congressional panel that pointed the finger at Alan Greenspan for not stopping it from running amok.

 

The former Federal Reserve chairman -- once revered as the oracle of economic wisdom -- defended his legacy before the panel, which also heard a former Citigroup executive say he had warned of the subprime danger.

 

The Financial Crisis Inquiry Commission kicked off three days of hearings with a look at securitization of subprime mortgages, in which risky home loans were bundled and resold onto the secondary debt market. At the peak of America's real estate bubble, Wall Street firms were securitizing huge amounts of subprime loans, putting bad assets on financial institutions' books and unmanageable debts on the shoulders of many homeowners.

 

It all came crashing down two years ago, triggering a devastating wave of foreclosures, paralysis in capital markets, and the worst financial crisis in generations. The market for subprime mortgage debt has since virtually vanished.

 

"The Fed utterly failed to prevent the financial crisis," said commission member Brooksley Born at a hearing in which Greenspan testified. In reply to Born and other commission members, Greenspan, who is 84 and who retired as Fed chairman in 2006, said: "Did we make mistakes? Of course we made mistakes ...

 

"Managers of financial institutions, along with regulators, including but not limited to the Federal Reserve, failed to comprehend the underlying size, length and potential impact" of market risks that contributed to the 2007-2009 crisis.

 

But former Citigroup executive Richard Bowen told the panel that he alerted senior managers to the dangers. "I warned extensively of the scope of the problems identified, beginning in June 2006," said Bowen, formerly business chief underwriter at CitiMortgage.

 

He said he e-mailed former U.S. Treasury Secretary Robert Rubin, then chairman of Citigroup's executive committee, and other executives in November 2007 warning of "the risks of loss to the shareholders of Citigroup." He said he also requested an investigation.

 

More on this will come on Thursday, when the commission is scheduled to hear from Rubin himself, as well as former Citigroup CEO Chuck Prince. The government pumped $45 billion in emergency capital into Citigroup during the crisis.

 

On Friday, the commission will hear from former executives and regulators of housing finance giant Fannie Mae.

 

The commission's hearings were not expected to unearth revelations that significantly alter the tale of the crisis, which is fairly well understood by now. But its proceedings could add momentum to a push for a regulatory overhaul.

 

The commission, set up by Congress, must make a final report by December 15. It was modeled on the Pecora Commission, which probed the 1929 stock market crash and the Great Depression, producing revelations that led to the creation of the Securities and Exchange Commission and other reforms.

 

The House approved a sweeping financial reform bill in December. The Senate is scheduled to begin debate soon. President Barack Obama, building on his healthcare reform victory, is making financial reform a top objective.

 

The Senate bill ranges across many topics, including how to fix the securitization business. Critics have accused loan originators, bundlers and others along the securitization chain of undermining loan discipline, obscuring risks behind complex debt structures and reaping huge profits in the process.

 

In addressing some concerns, the SEC on Wednesday proposed forcing issuers of mortgage-backed securities to disclose more about underlying loans and keep 5 percent of the credit risk in some cases.

 

Meanwhile, Goldman Sachs rebutted allegations on Wednesday that it had benefited unduly from government help and bet against its own clients during the crisis. The Wall Street firm said in its annual shareholder letter that it did not intentionally "bet against" securities in the mortgage market during the crisis, dismissing suggestions that it unfairly made money by placing bets against its clients.